Dec 4, 2023

Bond Reversal Powers November Advance

Weekly Market Commentary

Many things influence the direction of stocks. Corporate profits, economic growth, general market sentiment, inflation, and interest rates are among those variables.

At any given point, the influence of various factors on stocks will fluctuate. In 2022, investors were predominantly concerned about the Fed’s efforts to combat inflation.

As the year began, the Fed slowed the pace of rate increases and a much-anticipated recession has been slow to materialize.

As August approached, the 10-year Treasury yield broke past 4%, creating challenges for investors. But Figure 1 isn’t simply about bonds. Since August there has been a steep inverse correlation between stocks and yields. Note that the yield peaked near the recent low (October 27th) for the S&P 500 Index.

Between August 1 and November 30, the correlation between the 10-year yield and the S&P 500 has been -0.79, where a correlation of +1.0 would mean the yield and the index move together and -1.0 would mean the yield and the index move in opposite directions.

For investors who hold a well-diversified portfolio of stocks and bonds, it has been a win-win since yields and bond prices move in the opposite direction.

The longer the term to maturity, the greater the upward or downward move in bond prices when yields fall or rise (all else equal). For example, given the same decline in the yield on the 2-year and the 10-year Treasury, we’d see a greater price appreciation in the 10-year bond.

Why have we seen a reversal in sentiment for bonds? After a strong third quarter for the economy, economic uncertainty is creating some interest in Treasury bonds.

A more cautious approach by the Federal Reserve is also playing a role.

While the Federal Reserve has not shut the door on additional rate hikes, it’s looking increasingly like the Fed’s rate-hike campaign may be over.

At his November 1 press conference, Fed Chief Powell said the Fed is “proceeding carefully” four times, as policymakers aim to slow the rate of inflation without a significant rise in the jobless rate.

That’s a significant shift from a year ago when the Fed was aggressively raising interest rates.

Yet, the Fed doesn’t always get it right. It missed the surge in inflation and was forced to play catchup. Earlier this year, the Fed openly talked about a possible recession but has since removed it from its forecast.

Still, a good portion of its optimism is rooted in the slowdown in inflation.

The core Consumer Price Index (CPI), which excludes food and energy, has gradually eased. Though it remains too high, we’re seeing progress amid a slowdown in the rate of inflation—see Figure 2.

But don’t expect prices to return to pre-pandemic levels.

Since January 2020, the CPI is up 19% through October 2023 (latest data available), according to the St. Louis Federal Reserve. The Fed’s stated goal is to slow the annual rate of inflation to 2%, not return prices to pre-pandemic levels.

As of October, the core CPI is running at 4.0% annually and the CPI is at 3.2% annually.

While consumers want lower prices, the bar for investors is lower—a continued slowdown in inflation. It gets trickier when you mix in milder economic growth without a recession, or at worst, a very mild recession.

Both would further cement the idea that the rate-hike cycle is over. But might we soon see a reduction in interest rates?

Investors have repeatedly front-run rate cuts that failed to materialize. However, milder inflation and slower economic growth would raise the odds of a cut in interest rates.

Reproduction Prohibited without Express Permission. Copyright FDP Wealth Management. All rights reserved. Advisory Services offered through FDP Wealth Management, LLC, a state Registered Investment Advisor. Securities offered through Valmark Securities, Inc., Member FINRA/SIPC | 130 Springside Drive Suite 300 Akron, OH 44333-2431 | 800.765.5201. FDP Wealth Management, LLC is a separate entity from Valmark Securities, Inc. If you do not want to receive further editions of this weekly newsletter, please contact me at (949) 855-4337 or e-mail me at or write me at 8841 Research Drive, Suite 100, Irvine, CA 92618. FDP Wealth Management, LLC, Valmark Securities, Inc. and their representatives do not offer tax or legal advice. You should consult your tax or legal professional regarding your individual circumstances. Indices are unmanaged and cannot be invested directly in. Past performance is not a guarantee of future results.


How Do Investors Spell Relief?

Investors celebrated an ‘in line with expectations’ CPI that suggested the rate of inflation isn’t accelerating. It’s a small win, but it was enough to send the three major market indexes, the Dow, the Nasdaq, and the S&P 500 to new highs.

An Annual Ritual at the Gas Pump

You’re right if you have this nagging feeling that gas prices rise in the spring. As the graphic illustrates, on average prices rise through Memorial Day, plateau over the summer, and slip in the fall. This year is no exception, as prices echo the seasonal pattern.

Rate Cuts Still on the Table, Timing Less Certain

We often discuss the Federal Reserve and interest rates because both greatly impact investors. For starters, changes in interest rates have a significant impact on stock prices and income earned on savings. Sharply higher rates in 2022 pushed equities into a bear market.

Just Do It

That ubiquitous phrase from one of America’s most extensive athletic footwear and apparel makers seems to have been adopted by most American shoppers. The U.S. Census Bureau reported last week that retail sales jumped 0.7% in March, following a strong 0.9% rise in February.

The Road to Lower Inflation Takes a Detour

The rate of inflation is accelerating. That’s not how we hoped to start this week’s Insights. Take a moment and review Figure 1. The 4-month moving average has broken out of its long-term downward trend (red-dashed lines). On a monthly basis, prices bottomed in June and began to gradually turn higher. The upward trajectory picked up in January.